Ok, so, my spouse made fun of me for reading this book, except that it is a significant look at an important subject: what is the relationship between property, the rule of law, and economic growth? China has a powerful government but a weak rule of law; its explosive growth challenges some truisms of law and development. Stein did interviews to figure out what’s actually going on. This has obvious limitations in a repressive country suspicious of foreigners, and Stein only occasionally mentions that much of the new construction is empty, though he does devote greater attention to the fact that many new developments require displacing existing residents, often with extremely below-market compensation, with resulting political unrest. But Stein does get some explanations of how projects are actually approved and financed, which is an important addition to the literature.

Among other things: Shanghai has been trying to improve the formality and predictability of its procedures, limiting reliance on guanxi (connections), but this may have the effect of locking in the advantages of those who relied on guanxi at the beginning of the boom, became successful and experienced, and now have a head start. Since all the land is owned by the state (only use rights can be leased, and that at most for several decades; no one knows what happens when that time is up—whether there will be additional fees to stay in place, renewal as of right, or something else) and all the banks are too, and since there isn’t much in the way of conventional property tax, the lease of land rights is a major way for governments to get funding. There are Ponzi scheme elements to this: without property taxes, leasing new land is the only way to get more money. This contributes to the building boom, and individual Chinese are also desperate to own property; interest rates are heavily controlled and very low, while the stock market is small and rickety, so property is the most attractive form of investment. (Many Chinese expect to have to self-fund their retirement and perhaps take care of parents; agricultural workers aren’t entitled to the same kinds of state support as urban dwellers, and even those don’t expect much in retirement. This makes valuable investments vital.) Stein reports that, by 2007, 15% of urban households owned more than one home—though such homes are often held only for investment, and won’t even have plumbing put in; they’re not even generating rental income but rather expected to appreciate in value.

How is all this financed? The banks don’t generally lend based on ability to repay; they lend because they have lending targets. While some informants suggested that many if not most banks are insolvent due to high percentages of nonperforming loans, residential loans are likely to be performing because of the massive real estate bubble of the last decade or so. One point I noticed—banks charge higher interest rates on second loans, not because (as in the US) they’re deemed riskier but as a matter of social policy trying to limit this investment strategy. Anyway, the banks are doing what the state wants, including financing state-owned ventures that are themselves probably insolvent but provide jobs and benefits for many people. “Chinese citizens thus may be supporting China’s banks indirectly, by paying taxes to a government that dispenses some of those revenues to banks for risky loans to government entities and real estate developers, and directly, by placing significant private savings in those same banks.” Everyone recognizes that a significant slowdown in the economy would risk disruption of every part of this system. “One real estate developer’s answer to my question of whether China’s banks are stable—‘They must be!’—succinctly captures the combination of hope and faith that so many Chinese appear to feel.”

But does it work? Stein quotes a description of a mall with a hundred restaurants, 20,000 employees, an ice rink and a climbing wall, where no one buys anything—some visitors even bring their own snacks. “It is difficult to apply law and development theory to a nation in which non-economic government incentives such as these lead to the construction of projects that do not appear to be meeting any market demand.” In that sense, Stein suggests, as with the French Revolution, it may simply be too early to tell whether the system is working, though he points out that Western financial follies such as securitization aren’t looking too good right now either. The bigger question is whether the liberal dogma that development requires robust and clear legal systems and strong protection for property rights is challenged, disproved, or altered by China’s experience. Stein offers various possible takes on this—China is unique; China actually provides more security than the formal law would seem due to relatively predictable informal practices; China proves that people will optimistically take risks even with low protections for investment if the return is high enough; and so on. His modest conclusion is that China’s development shows that the standard model is only a model: local constraints and human behavior are key variables even if the rule of law is also important for long-term success. What is really up in the air is how Chinese law—and government—will respond to an extended slowdown, which none of his informants had ever experienced in the relatively short period that China has had a land development/construction sector. ( )

Wikipedia in English

With massive growth taking place in the real estate industry, how can China develop a free market and private ownership of land while still officially subscribing to Communist ideology? This study uses fieldwork interviews to establish how the Chinese real estate market operates in practice from both legal and business perspectives. It describes how the market functions, which laws are applicable and how they are applied, and how a nation can achieve dramatic economic growth so rapidly while its legal system is so unsettled. The book demonstrates how China is drawing on the world for ideas while retaining a domestic system that remains essentially Chinese, and how the recent revitalization of China's real estate market has confounded the predictions of many developments economists.